The futures will be traded at SGX’s subsidiary the Singapore Commodity Exchange. Sicom offered coffee futures once before, in 1994, but they failed to catch on. The bourse hopes to open trading in the first half of this year.
In relisting coffee, SGX is echoing its move in February, when it reintroduced a fuel oil future after abandoning a similar contract a few years ago. The Fuel Oil 380 Centistokes Future has won Commodity Futures Trading Commission approval, so is now available to market participants in the US.
The launch of coffee futures is dependent on market participants approving of a proposed rule change, which SGX unveiled on February 25, for a period of market feedback until March 10.
The idea is to “provide the flexibility to accommodate physically deliverable contracts with varying delivery mechanisms and re-novation processes.”
Under SGX’s present rules, a contract between two members is replaced with new contracts between each trading party and the clearing house, in a process known as novation.
Then a re-novation process occurs after the buy and sell orders have been matched and the firms have paid the required margins and, where required, the settlement value. When the re-novation process occurs, SGX is no longer the central counterparty to that trade.
The exchange wants to make the rules more flexible, so that re-novation could take place according to “the occurrence of other events”.
If market participants do not object to the proposals, SGX and Sicom will try to challenge London’s NYSE Liffe, which dominates robusta coffee trading with 2.51m contracts exchanged last year.
The head of one futures commission merchant in Singapore said the Liffe contract’s liquidity would make SGX’s foray into the commodity difficult, but that there was demand for an Asian benchmark for the coffee strain.
Böcker’s plan
With the appointment of Magnus Böcker as SGX’s chief executive, announced last July, the exchange has refocused on its commodity products.
Before coffee comes in, Sicom will open trading of its new Gold Deferred Settlement Contract on March 30.
Unusually, it is priced as a spot contract with deferred settlement. Open positions at the end of each trading day are automatically rolled forward using current interest rates.
They are margined and marked to market daily based on the afternoon price established by the London Gold Market Fixing.
A position is closed by entering an opposite position. Trading hours are from 8.30am to 11pm Singapore time, to capture the Asian and European trading days.
The contract is intended to give market participants exposure to the international spot gold price without having to handle any physical delivery of gold nor payment of the full notional contract value.
“We are pleased to introduce our first new contract, the Sicom Gold,” said the exchange’s chief executive, Jeremy Ang. “With its innovative features, the security of trading on an exchange and the popularity of gold trading, we are positive that Sicom Gold will appeal to global investors.”
The contract is for 10 troy ounces of fine gold with 100% purity, and the price will be quoted in US dollars a troy ounce. The tick size is $0.10 an ounce, so the tick value for a contract is $1.
The threshold for negotiated large trades is 300 lots. Initial margin is $608 a lot, with maintenance margin of $450. These are about 4% to 5% of the contract value and will fluctuate with price volatility.
The value date is two London business days after the trade date. Open positions at the end of each day are rolled over to the next value date.
A rollover interest charge will be collected from or paid to the buyer and seller, depending on the Gold Forward Offered (Gofo) rate. The interest charge formula will include the contract value, Gofo, an exchange charge and, where applicable, a broker charge.
As a precursor to these developments, Sicom obtained a new licence to operate a commodity market and clearing house under the Commodity Trading Act.
The new regulatory status was granted by International Enterprise Singapore (formerly the Singapore Trade Development Board). A spokesperson said it “allows Sicom to introduce commodity CFDs, forwards and leveraged commodity contracts which are regulated under the CTA”.
SGX’s existing licence is as a recognised market operator and was issued by the Monetary Authority of Singapore under the Securities and Futures Act.